How we lost control of the industry

Written by Dick Strom

Recently, my wife Bobbbi's newer model Volvo was rear-ended. Although damages amounted to only $400, a GEICO representative remained unwavering in her efforts to try to force Bobbi to drive the 50 mile round trip to their nearest drive-in claim center. Speaking to her immediate superior got the same reaction. Even reminding these representatives that we own a collision shop and know our insured motorist's rights didn't dissuade these robots from their rote statements.

Strom

But when Bobbi informed our State insurance commissioner of the situation, the claim was quickly settled (in retrospect, though, following their orders might have made a great article, seeing exactly how they went about it). I'll wager good money that their claim handler's "apparent misunderstanding" of the claim process never resulted in her being reprimanded, corrected, or otherwise re-educated.

Experiences like these better help us to understand the pressure under which some of our faithful customers have crumbled. My family doctor, whose vehicles I've repaired for years, the very man who bristles when I ask him how insurance-paid PPOs have interfered in his medical career, was pressured into having his car steered to a competitor's shop following a recent accident in which he was seriously injured

Under the emotional and physical trauma, and the flood of associated arrangements needing to be made, injured parties become easy targets for persistent insurance representatives.

Striking it rich in auto body repair

Near the end of the 1970's, not many years after I joined the ranks of this "profession," the auto body repair business was "discovered" by at least one highly respected business journal. This magazine published columns knighting auto body repair as the business with most potential for investment profit. Sweating out long days in my one-man hole-in-the-wall, I'd laughed this off as drivel from an over-imaginative columnist with a deadline to meet.

In retrospect, the article was most likely written from facts published by the Federal Bureau of Labor Statistics, since at that time well established shops actually had become relatively lucrative, basking in the sunshine of a yet enforced 1963 Consent Decree, and an abundance of true body craftsmen not yet ready to retire. Soon, many would be entrepreneurs with little or no understanding of collision repair or business experience, began cashing in their life savings and assuming bank loans for the chance to strike it rich in bondo. A former truck driver who bought out one of my competitors landed in bankruptcy in record time.

Like locust descending on a Midwest wheat field, the resultant rush to dominate and control collision repair has been motivated by the whims of venture capitalists, most with no love for this industry beyond its potential to make them rich quickly and sell out fast.

In the past, insurers with billions in disposable capital have twice tried their hand at collision repair, both times ending in failure. The problem to date: how to make collision repair profitable enough for their tastes. But efficiencies have brought about change, and what things insurers couldn't or wouldn't own in the past they devised means to control. Last month, though, Allstate took the plunge into collision repair ownership.

If you can't own, control

Texan Roy Smalley, in an article that appeared in several collision publications, "Do Auto Insurers Control the Collision Repair Industry?," prefaced his well-reasoned expose with what is unarguably the conviction of most repairers, though seldom verbally expressed. "I believe most casualty insurers in the U.S. are suborning their policy holders rights, as well as those of collision repairers, to a competitive environment.

"Insurers are making a pervasive, coordinated, long-term effort to control the process of insuring collision repair. Their efforts may abridge consumers' choices, reduce values of repaired automobiles without notice and proper compensation, endanger the public, and eliminate fair competition. These activities are supported at state and federal levels to potentially influence the political process.

"The sophistication, organization, and control that many insurers exert, due to their size, have afforded them substantial influence over shops and consumers. Many shops feel this insurer influence borders on coercion and intimidation."

Smalley described how DRP agreements exert direct and indirect influence on consumers to discourage use of shops other than their DRPs, and that insurers claim they have the competitive right to steer policyholders (even though many states laws prohibit or regulate steering). "The contract may join the insurers and their DRP shops in a direct business relationship, competing with independent shops that aren't on these insurers' DRPs, often performing incomplete repairs in order to make up for their DRP profit shortfalls.

"In return, insurers agree to send policyholders to their DRP shops, using direct and indirect influence to discourage use of shops other than their DRPs."

State Farm and PCP

Smalley continued, "In my view, the auto insurance industry is dominated by State Farm, the largest, arguably best organized and managed insurer, which dominates and therefore leads most other insurers in defining relationships with policyholders and shops." Shops trying to negotiate equitable rates with insurance appraisers and supervisors from companies other than State Farm have for years been stymied by the admonition, "when State Farm changes its rates…"

Most other insurers consider State Farm PCP "surveys" as gospel. And yet the results of State Farm's past surveys are heavily depressed by shops' knowledge that the rates they state, if higher than the depressed rates of other shops, might exclude them from State Farm-paid work. This so-called "competitive pricing" system, therefore, never has reflected the actual costs of doing business. Added to this inequity, State Farm's PCP has been figured only on the lowest 51% of responses to their surveys."

"Phobia-conditioned pricing" might better describe the process. Call it what you will - it's still the same old steering show.

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Body men lose ground to mechanics

Smalley noted the apparent effect of the DRP agreements: According to U.S. Labor Department data in the years between 1983-1998, body repairers income dropped 100% in relation to auto mechanics, as most anyone in this business over those years will confirm. Collision repairers in my area once were $2/hour higher than mechanics, but today are doing well to receive 2/3 of local mechanics' door rate.

During that period, shops in many parts of the country backslid into a five-year period with no labor rate increase, while costs of doing business continued to go through the roof. Since then, increases haven't kept up with costs.

Considering that State Farm began its pricing surveys in the early 1980s and that other insurers follow their lead, and considering that today's vehicles are much more complicated to repair and business more costly to negotiate, it seems only logical that this so-called PCP has had a strong dampening effect on collision repair prices.

"Even if we forget for a moment that this survey omits shops that disagree with State Farm's List of Criteria, the 'survey' is still a one-sided, non-scientific, non-statistical and indefensible procedure to assess rates for a service… unprecedented in a free market. Many shops comply just to stay in business." It seems likely that this could be considered a restraint of trade.

Smalley continued, "Consolidation of shops further extends insurers' ability to steer consumers, resulting in increased control of the repair process. DRPs were the initial phase of Preferred Provider Organizations (PPOs), which are consolidators' current plan of action: In PPOs the insurer is the customer, not the car owner."

Considering Allstate's recent buyout of Sterling Collision Centers (a consolidator with 39 present locations), this insurer's plan has become far more obvious. Autobody News in June 2001 reported on an Allstate memo: "As current Sterling stores transition to Allstate-exclusive work, we anticipate that processes will change to reflect a single carrier model....According to Allstate spokesman Michael Trevino, Allstate has no plans to apply to (individual states) insurance departments to get an endorsement change in its policy setting up a HMO-type policy....Sterling (shops) will receive priority for referrals in the markets in which its stores are located, based on available capacity."

Allstate's George Ruebenson stated in a Jan, 2001 Allstate employee newsletter that by aligning procurement and claims, Allstate hoped to cut procurement expenses by 60%.

Though other consolidators have pooh-poohed Allstate's acquisition of Sterling, similar moves have to be paramount on their minds: It's common knowledge that the ultimate purpose of shop consolidation is to create companies large enough to be attractive to large conglomerates with venture capital at their disposal.

Insurers have the most to gain from reduced pay-outs for repairs, plus possible tax breaks… plus they just happen to have billions in venture capital burning holes in their pockets. Also consider, from an insurer's standpoint, the advantages of being able to run a few insurer-owned stores, even at a loss, in order to authoritatively artificially hold down the overall rates requested by independents. It's worked in the glass industry.

Beginning of the end for DRPs?

In a must-read article, Allstate Purchase of Collision Repair Centers - Pushing the Envelope? on www.fuelline.com, "an anonymous, reliable source with extensive knowledge of the insurance industry" stated, "This is the beginning of the end for probably 90% of the DRP shops". Allstate's buying out of Sterling "…is a clear case of vertical price-fixing that is absolutely a violation of (the 1963 Consent Decree) and of the insurance industry's exemption from antitrust laws. Allstate will set the repair rates for Sterling, and Sterling will make the repairs at the prices Allstate sets. This is not the business of insurance. The antitrust exemption for the insurance industry is limited to the business of insurance."

The source continued, Allstate's action "blatantly shows that the insurance industry does what it does because it believes it can get away with it".

Allstate is out front taking the heat on this issue, (but) other insurers will start buying up consolidators while consolidators are busy buying up high-end collision repair shops. Once the consolidators have insurance money behind them, they'll be buying up other body shops or building body shops in various areas where 60% of the DRP work in that area goes. The insurance industry will push all the repair work to the consolidators, and DRPs who are dependent on that insurance company revenue stream will be in serious trouble." Sound ominous? It is!

As consolidator M2's CEO Hunt Ramsbottom hinted, Allstate's acquisition of Sterling "…breaks the log jamb" in getting consolidators to "the next level". Are you willing to venture a guess what "the next level" might refer to? Whatever it might be, it'll definitely include greater control of the repair industry.

Dick Strom is the owner of Modern Collision Rebuild on Baindridge Island, Washington (moderncol@aol.com). He is a member of TheCCRE, a group that represents the interests of collision shop owners in their pursuit of operating as independent business entities. For further information on TheCCRE and the 1963 Consent Decree that the group wants to see enforced by the U.S. Justice Department, contact Dana Semeit at 877-700-7743 or log on to www.theCCRE.com. All correspondence, including membership renewal, should be addressed to TheCCRE, 3151 Skylane, Suite 104, Carrollton, Texas 75006.